The rising exposure of state governments to domestic debt market is becoming worrisome. Against the repeated advice of local and external financial agencies, the states have borrowed beyond the allowed threshold. Recent data from the National Bureau of Statistics (NBS) and the Debt Management Office(DMO), show that almost all the 36 states are currently trapped in huge domestic debt totaling N4.19trillion as at June 30, 2020 . Most of the debts arose from money owed to contractors and bonds taken from the capital market. State governments’ domestic indebtedness is part of Nigeria’s total debt portfolio of N31trillion.
This raises concerns about the fiscal crisis facing most of the states. Many of them are currently grappling with low internal revenue generation and declining revenue from the Federal Account Allocations Committee (FAAC). A breakdown of the states’ and FCT’s domestic debts shows that Lagos has the highest with N493.3billion or 11.77 per cent of the debt stock. It is followed by Rivers, N266.9billion; Akwa Ibom, N239billon; Delta, N236billion; Cross River, N165billion; Bayelsa, N150billion and Ogun, N148.7billion. Yobe is the least indebted state with N29.2billion.
Of the six geo-political zones, the South West is reported to have the worst domestic debt exposure of over N1.5trilion, indicating 26.2 per cent exposure to the domestic capital market. This is followed by the South South zone, North Central, North West, North East, and the South-East with the lowest among the sub-national debts, accounting for 7.7 per cent. It is worrisome that while the size of the Federal Government’s debt is said to be within the borrowing threshold, the domestic debts of the 36 states and the FCT have increased alarmingly in the last few years that servicing them has become a huge challenge.
For instance, between 2014 and 2018, the states’ domestic debts rose from N1.71trillion to N4trillion, indicating N2.69trillion increase of the debt stock. Undoubtedly, this has serious implications for the economies of the states. Many of them are already hard pressed with payment of workers’ salaries, pensions and other obligations. The Federal Government’s debt, which has risen to N18.89trillion under the present administration, raises doubt about the government’s ability to meet its financial obligations.
The situation is disturbing and could put the states to near fiscal collapse, a dire situation that has made many of them to walk on a tightrope, barely surviving on the monthly allocations from the Federal Government. Even at that, most of the states are reportedly paying between N500million and over N1billion monthly on debt services. The situation has become so challenging for most of the states to cope that the Vice President, Prof. Yemi Osinbajo, last year, stated that it would be very tough for most states in the country to survive if they fail to look inwards.
We think that Osinbajo’s concern is still valid and merits a careful reflection on the present federal fiscal structure. In fact, how far the states can stay afloat without over-dependence on the monthly allocations from Abuja is a matter of great concern. According to the Nigeria Extractive Industries Transparency Initiative (NEITI), at least about 15 states in the country face imminent bankruptcy. Also, between 2017 and 2018, the 36 states’ Internally Generated Revenue (IGR) was not more than N1.3trillion, with Lagos State IGR exceeding that of 24 states put together.
This implies that the states could only generate about 15 per cent of their revenues and look up to the federal government for 85 per cent of their financial requirements. There is, therefore, urgent need for the states to adhere strictly to the provisions of the Fiscal Responsibility Act on borrowing. We urge the National Assembly to address this issue and come up with a legislation that will stipulate more stringent conditions on how the states can abide by the allowed borrowing limit and prevent the looming debt overhang. It appears the states are not complying with the provisions of the Act, which in Section 44(1-5), section 45(1)(2), stipulate conditions for borrowing, either from domestic or external market.
Apparently, many states have flouted these provisions as well as the recent guidelines issued by the Debt Management Office (DMO) on borrowing. While there is nothing wrong with borrowing, it is important that the loans should be prudently used for infrastructure and other productive sectors that can repay such debts. States should avoid investing in white elephants, and borrow cautiously and when it is exceedingly necessary. Clearly, the present domestic indebtedness of most states may have arisen as a result of lack of transparency and reckless spending by some governors. Let the states cut the cost of governance and spend prudently.